"In evaluating people, you look for three things: integrity, intelligence and energy. If you don't have the first one, the other two will kill you."
Sir John Templeton.

Life Insurance

Do you need life insurance?

Life insurance is not like auto insurance. The government doesn't make you take out a policy. That said, if you have children or other dependants who would suffer financially if you died, it is a good idea to have life insurance.

A life insurance policy is designed to ease the financial burden of those who depend on the income received by the person who holds the policy. But if you have no dependents, there is no pressing reason for you to spend money on life insurance.

What is life insurance?

Life insurance is a contract between an insurance company and the person holding the policy. In the contract, the company agrees to pay a specified amount in the event of the person holding the policy.

The contract specifies who will collect the money. This person is known as the beneficiary.

How much insurance do you need?

If you decide you want insurance, it is important to know how much you need. You can figure this out yourself or with the help of a trained life insurance agent.

When choosing coverage, what you need to do is determine how much money your family would need if you were to die. In your calculation, you should include expenses that will occur immediately after your death such as funeral costs and legal fees.

To these one-time fees, add ongoing expenses such as groceries, clothing, utility bills, day care, mortgage payments and outstanding loans. You may also want to include the cost of sending your children to university.

The sum of all these expenses is the amount of life insurance you will need.

How much will insurance cost?

There is no set amount that everyone pays to obtain life insurance. Insurance companies take a number of factors into account when calculating annual premiums. These factors include the amount of the policy and its type, the age and sex of the person being insured and whether or not that person is a smoker.

Types of insurance

There are two basic kinds of life insurance: term and permanent.

Term insurance is best suited to cover short-term expenses such as mortgage and the costs of education. This type of insurance gives protection for a specific amount of time - one year or five or 10, or to age 60 or 65. Premiums remain constant during the life of the policy, but increase when it is renewed. Benefits are paid only if the person insured dies during the term of the policy.

A term-to-100 policy is a type of term insurance that pays a death benefit if the policyholder dies before the age of 100. Premiums remain constant regardless of the age or health of the policyholder. Most term-to-100 policies don't pay dividends.

Permanent insurance is best suited for long-term expenses and can help replace the income of the person whose life was insured.

There are several types of permanent insurance:

* With whole life, premiums remain fixed as long as the policy is in place. As long as the premiums are paid, the policy remains in effect.

As the premiums continue to be paid, the policy builds up a cash value that the person holding the insurance receives in the form of dividends. These dividends can be used to lower premiums, purchase more insurance or pay for term insurance.

* With variable life insurance, the policyholder is not allowed to change the amount of the premiums or the amount of coverage. The policyholder can borrow money from the policy, but money cannot be withdrawn during the person's lifetime.

Part of the money that the policyholder pays into the policy as premiums goes into a cash value account, which is then invested in securities. The policy's death benefit consists of one part that is guaranteed and a second part that varies depending on the performance of the cash value account.

* With universal life insurance, the policyholder has control over how the policy is structured and can borrow against it or withdraw money from it. The policy can be paid off or premiums can be continued for life. The amount of coverage provided by the policy can also be changed.

In the past, many universal life policies were calculated assuming a higher rate of interest than they actually received. If you have a universal life policy, it is a good idea to ask your insurance agent to evaluate it to see if it needs to be adjusted.

All contents copyright © Joe Chisholm 2001
E-mail: chisholm@queensbury.com